Impact of Financial Education and Literacy on Investment Behaviour

Abstract

Abstract: Economists are beginning to investigate the causes and consequences of financial illiteracy to better understand why investment and retirement planning is lacking and why so many households arrive close to retirement with little or no wealth. This study reveals that many households are unfamiliar with the most basic financial and economic concepts needed to make saving and investment planning. Such financial illiteracy is widespread: young and older people in many countries appear miserably under-informed about basic financial computations, with serious implications for saving, investment planning, and other financial investment decisions. Governments and several non-profit organizations have undertaken initiatives to enhance financial literacy. This study estimates how financial education affects a person’s financial literacy score, short-term and long-term financial behaviours from collected data. There are three financial education categories: at school level, college level and learning with additional courses. These courses detail has not been studied current literature about financial education. An essential indicator of people’s capability to make financial and investment decisions is their level of financial literacy. Results are found to be robust across different measurements of financial knowledge and behaviour, and the issues were specifically addressed. This study provides a comprehensive insight for policymakers as well as financial individual investors.

Introduction

I. INTRODUCTION

The Organization for Economic Cooperation and Development (OECD, 2005) defines “financial education” as: “The process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction, and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.” Building upon this definition, discuss the state of financial literacy and financial education programs, and deliberate whether investors give the impression of possessing the financial literacy to process financial evidence and articulate adequate saving plans.

II. LINKING FINANCIAL LITERACY AND ECONOMIC BEHAVIOUR

While the low levels of financial literacy are troubling in and of themselves, policymakers are most concerned because of the potential implications of financial illiteracy for economic behaviour. One example is offered by Hogarth, Anguelov, and Lee (2005), who demonstrate that low educated consumers are extremely represented amongst the “unbanked,” those lacking any transaction account. The financial literacy definitions used by Lusardi and Mitchell (2014) and Remund (2010) closely match the ideas of being financially literate for this research. This includes understanding financial concepts and using that knowledge to make sound financial decisions.   Other research has cited in their literature reviews that long-term and short-term decisions are an important component of financial literacy (Fernandes, Lynch, and Netemeyer, 2014). This study focuses on how financial education increases financial knowledge and the likelihood of engaging in different financial behaviours. It also incorporates the time dimension from previous studies by studying behaviours that are considered short-term and long-term.  

III. INDIA’S GROWING FINANCIAL LITERACY

Financial literacy is the ability to worthily be able to possess many financial skills, such as personal finance management, budgeting, and investing. Financial investments and services have recently become widespread among people of all economic backgrounds. India’s financial literacy rate among its young  and adult population has been growing due to various factors, including recent technological advancements and media coverage. The Government of India and various regulators are constantly working towards growth by implementing financial literacy courses, workshops and schemes.

From mobile banking to online payments and insurance; the country has a huge number of online financial services users. This helped improve India’s financial literacy as the awareness and ease of insurance and banking increased.

Number of transactions concerning digital payments in India grew 5x from 1,004 crores (10.04 billion) in 2016-17 to 5,554 crores (55.54 billion) in 2020-21. Furthermore, the value of fintech transactions is expected to rise at a CAGR of 20% to US$ 138 billion in 2023 from US$ 66 billion in 2019.

IV. GOVERNMENT INITIATIVE TOWARDS FINANCIAL LITERACY

Strengthening financial inclusion in India has been an important agenda of the government and the various regulatory bodies. Efforts have also been taken to spread awareness and increase financial literacy among small businesses. Listed below are few such initiatives taken by respective regulatory authority: Reserve Bank of India (RBI); Securities and Exchange Board of India (SEBI); Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA)

V. PURPOSE OF THIS STUDY

The target population of this study were Students, Employees, research scholars and  of educational institutions employed and residing from selected cities of Tamilnadu. It was a cross-sectional quantitative research study. By using a detailed questionnaire, primary data were obtained. The sample size was 293; through convenience sampling. Descriptive analysis, parametric test, reliability test, and correlational examination with the aid of SPSS are knowledge investigation techniques used in this examination study to infer outcomes.

VI. RESEARCH OBJECTIVES

1. To discover the intervening impact of financial literacy and financial behaviour of target group of education institutions.
2. To understand the several investment behaviour with the financial literacy and education.

The main goal of this study is to identify the effectiveness of financial education offered in college, and other financial education certification courses. Financial education is studied various ways. Namely, whether financial education increases an investment and person’s planning knowledge about various financial topics. 

VII. OUTLOOK FOR FINANCIAL LITERACY

Financial literacy is defined as "people's ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions" (Lusardi and Mitchell, 2014). It is also the case that communities and a national economy with informed and financially literate consumers will have more stable and efficient markets (Braunstein and Welch, 2002; Bernanke, 2006).   Annamarie Lusardi, a prominent economist conducting research in financial literacy, notes that “…just as it was not possible to live in an industrialized society without print literacy…so it is not possible to live in today’s world without being financially literate.” Economists are interested in studying financial literacy and financial education. Informed consumers are more equipped to make better financial decisions that can positively affect households. Even short-term effects of financial education courses (such as increased short-term saving) can have long-term impacts on a person’s lifetime consumption. Previous research suggests four traditional approaches to financial education—employer-based, school-based, credit counselling, or community-based—all of which do not have clear results about their effectiveness (Gale and Levine, 2010).   The higher levels of objective financial knowledge have been positively associated with earning positive investment returns (Chu et al. 2017), engaging in long-term financial behaviours related to saving and investing (Henager and Cude 2016), and reducing the odds of using high-cost alternative financial services such as pawn shops and tax refund anticipation loans (Robb et al. 2015). Financial education should increase financial knowledge and also help people behave differently, to make better financial decisions for themselves or their households. The financial behaviours may be hierarchal and that some behaviours may be more affected by financial knowledge (Hilgert, Hogarth, and Beverly 2003). 

A. Findings and Analysis

The research says that being financial literacy should not only include an understanding of key financial concepts but also include the ability to manage personal finances through short-term decisions and long-range planning and investment behaviours.

B. Socio-Demographic Profile

Out of 293 respondents, 152 were male respondents.181 respondents were married. 124 and 121 respondents responded from the age of 26 to 35 and 35 to 50, respectively. From the data, 171 many respondents have maximum qualifications as post-graduates and respondents were from academic research backgrounds. When the researcher reviewed the data, the type of fund used by the respondents for their investments, it was found that 283 respondents out of 293 were using their savings. 139 and 137 respondents gained investment knowledge at their college level and by taking additional courses, respectively.

From the mean values it is found that respondent’s with senior management level have higher opinion heard and over confidence behaviour than other group respondents. The respondents from Academic researcher group have higher opinion illusion of control behaviour than other group respondents

Conclusion

The order of investment preference answered by the respondents were Fixed deposit, Mutual funds, Gold, Shares and Real estate. The respondents with different education background and their time of exposure to learn about how to manage and plan investments are independent. The learning about the investment and planning can be as part of curriculum. The respondent’s with age group above 50 years have higher opinion and Professional group have higher opinion Herd behaviour and Illusion behaviour, than other group respondents. Whereas Overconfidence is observed in respondents with PhD qualification; the possible reason for this may be because of the higher level of financial literacy in them. From the mean values it is found that respondent’s with senior management level have higher opinion herd and over confidence behaviour than other group respondents. The respondents from Academic researcher group have higher opinion illusion of control behaviour than other groups respondents. The importance of financial literacy entails having a basic understanding of finances is essential. With any educational plan, the continuous learning process of the personal finances. Before you spend money, you must understand how it functions. This requires time and careful application. Too many of us have discovered the importance of money too late in life or what it means to be drowning in debt. Suggestions for educating Financial Well-being from School level: 1) Begin early. Evidence suggests that by the age of seven, children’s attitudes toward money are well developed. So, beginning with pre-school, incorporate learning about the world of money into your curriculum. 2) Put what you’ve learned into action. It has been demonstrated that combining in-class and experiential learning is the most effective and starting a school savings bank, encourage student groups to open bank accounts or teach children how to manage a budget. 3) Make the most of everyday occurrences. Financial education can be especially effective when combined with a chance for the young person to put it into practice. 4) Include parents and caregivers. School-based financial education, like other areas of learning, will be most successful when parents participate as well.

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Copyright

Copyright © 2023 Dr. Gayathri T, Prof. S. Ganesan. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.